MANILA, Philippines - Monetary authorities believe that the decision of the Federal Reserve to stimulate the sluggish economy of the United States would further translate in higher capital inflows into emerging market economies, including the Philippines.
Bangko Sentral Gov. Amando Tetangco Jr. said in a text message to reporters that the shift of funds to emerging market economies, including the Philippines would continue with yields in the US remaining low for a longer period.
“The BSP will therefore remain vigilant in monitoring developments and gauging how effectively this Fed move will perk real US growth, and therewith global inflation outlook,” Tetangco stressed.
In an attempt to breathe new life into the struggling US economy, the US Fed announced it would buy $600 billion in long-term Treasuries over the next eight months and at the same time reinvest an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments.
As part of the second wave of quantitative easing (QE2), the body intends to buy a total of $900 billion worth of Treasury bonds (T-bonds) until the third quarter of next year to stimulate the US economy that posted only a two-percent gross domestic product (GDP) growth in the third quarter while its unemployment rate stood close to 10 percent.
For his part, BSP Deputy Gov. Diwa Guinigundo said in a separate text message to reporters that the quantitative easing in the US would fuel a surge of capital into emerging economies in Asia, including the Philippines.
“ It may in fact exacerbate what is going on in emerging markets, including the Philippines. In the US, the issue is whether quantitative easing will actually work. More foreign exchange goes out in search of yield,” Guinigundo stressed.
Data released by the BSP yesterday showed that foreign portfolio investment inflows or hot money surged by 301 percent to $1.825 billion as of October 15 this year from $454.5 million in the same period last year. Foreign portfolio inflows zoomed by 53 percent to $7.938 billion from $5.176 billion while outflows went up by 29.5 percent to $6.113 billion from $4.722 billion.
The BSP sees inflows of foreign portfolio investments or “hot money” hitting $2.9 billion this year or 747 percent higher than the $388.02 million registered in 2009. Foreign portfolio funds are also called hot money because they could be taken out of the country as quickly as they come in.
He warned that the strong inflow would help sustain the continued strengthening of the peso against the dollar. “Thus, foreign exchange flows can be heavier and more destabilizing. There is more pressure building up against the peso,” Guinigundo warned.
Last week, the BSP’s Monetary Board approved certain amendments to the Manual of Foreign Exchange Transactions as part of the central bank’s efforts to keep the foreign exchange regulatory framework responsive to and attuned with current economic conditions and at the same time help temper the strengthening of the peso against the greenback with a minimal impact on domestic liquidity and inflation.
The central bank’s policy-setting body agreed to double the present ceiling on the amount that residents may purchase from authorized agent banks for outward investments including investments in Republic of the Philippines bonds and other debt instruments issued by the Philippine government to $60 million from $30 million.
It lifted the registration requirement for outward investments in excess of $60 million limit and replace this with reporting to the BSP and at the same time extend the periods for inward remittance and conversion to pesos or reinvestment of proceeds and related earnings to 30 banking days from two and seven days.
Likewise, the limit on over-the-counter foreign exchange purchases by residents from banks without documentation for non-trade current account purposes was also doubled to $60,000 from $30,000 to encourage customers to course their transactions through the banking system instead of the unsupervised foreign exchange market.
On the other hand, non-resident tourists or balikbayans could reconvert at airports and other ports of exit without need for proof of sale of foreign exchange for pesos was increase to $5,000 from the present ceiling of $200.
It also raised to $1 million from $100,000 the amount residents could purchase from banks to cover advance payment requirements for import transactions without prior BSP approval and at the same time allowed the private sector to prepay BSP-registered foreign loans to be funded with foreign exchange from banks without prior approval.
“The challenge really is to increase demand for foreign exchange and temper peso appreciation,” Guinigundo said.